MANAGERIAL MICROECONOMICS

FMCG SECTOR AT CROSSROADS

FMCG Industry in India

The Indian FMCG sector is the fourth largest sector in the economy with a total marketsize in excess of US$ 13.1 billion. It has a strong MNC presence and is characterized bya well established distribution network, intense competition between the organized andunorganized segments and low operational cost. Availability of key raw materials,cheaper labor costs and presence across the entire value chain gives India a competitiveadvantage. The FMCG market is set to treble from US$ 11.6 billion in 2003 to US$ 33.4billion in 2015. Penetration level as well as per capita consumption in most productcategories like jams, toothpaste, skin care, hair wash etc in India is low indicating theuntapped market potential. Burgeoning Indian population, particularly the middle classand the rural segments, presents an opportunity to makers of branded products toconvert consumers to branded products. Growth is also likely to come from consumer'upgrading' in the matured product categories. With 200 million people expected to shiftto processed and packaged food by 2010, India needs around US$ 28 billion ofinvestment in the food-processing industry. Around 70 per cent of the total householdsin India (188 million) reside in the rural areas. The total number of rural households isexpected to rise from 135 million in 2001-02 to 153 million in 2009-10. This presentsthe largest potential market in the world. The annual size of the rural FMCG market wasestimated at around US$ 10.5 billion in 2001-02. With growing incomes at both the ruraland the urban level, the market potential is expected to expand further. An averageIndian spends around 40 per cent of his income on grocery and 8 per cent on personalcare products. The large share of fast moving consumer goods (FMCG) in total individualspending along with the large population base is another factor that makes India one ofthe largest FMCG markets. Rapid urbanization, increased literacy and rising per capitaincome, have all caused rapid growth and change in demand patterns, leading to anexplosion of new opportunities. Around 45 per cent of the population in India is below20 years of age and the young population is set to rise further. Aspiration levels in thisage group have been fuelled by greater media exposure, unleashing a latent demandwith more money and a new mindset.A distinct feature of the FMCG industry is the presence of most global players throughtheir subsidiaries (HLL, P&G, Nestle, Heinz, Colgate-Palmolive), which ensures newproduct launches in the Indian market from the parent's portfolio. Availability of key rawmaterials and cheap labor costs give India a competitive edge. Rural and semi-urbanmarkets will drive the FMCG business in the country to a compounded annual growth of50% for the next six years. A good number of malls, nearly 220 in the country, wouldcome up in the next four to five years in semi-urban areas that would lead to anincrease in the demand for the products.Brief Background of the Firm

In the summer of 1888, visitors to the Kolkata harbour noticed crates full of Sunlightsoap bars, embossed with the words "Made in England by Lever Brothers". With it beganan era of marketing branded Fast Moving Consumer Goods (FMCG) in India.

The theme of the project being "Crossroads", we have chosen Hindustan LeverLimited (HLL) as:a) It being the market leader in the sector for most of the years.b) Facing stagnation in top line growth.c) Thus, HLL is at the "Crossroads" of a major revamp in its strategy to appeal to theconsumer segment.

HLL as we see it now was born in 1956 through merger of 3 separate entities.

Chief Products

Currently, HLL is India's largest fast moving consumer goods company, with leadershipin Home & Personal Care Products and Foods & Beverages. HLL's brands, spread across20 distinct consumer categories, touch the lives of two out of three Indians. They endowthe company with a scale of combined volumes of about 4 million tonnes and sales ofRs.10,000 crores. With 35 Power Brands, HLL meets everyday needs for nutrition,hygiene, and personal care with brands that help people feel good, look good and getmore out of life.HLL is subsidiary of Unilever which holds 51.55% of the equity. A Fortune 500transnational, Unilever sells Foods and Home and Personal Care brands in about 100countries worldwide.HLL has diversified product portfolio from all segments of FMCG. The major products ofthe firms are:Personal Care: Sunsilk, Clinic, Peposodent, Close-up, Lakme, Ayush, Lux, Breeze, DoveHome Care : Surf Excel, Wheel, Rin, Hamam,Food : Brooke Bond, Lipton, Kissan, Kwality Wall’s, Bru

Market Structure

The FMCG structure in India:

FMCG(HLL)

Personal Care Home Care Food & Beverages

Kirana Stores Door to Door Internet Super Store/Malls

ConsumerMajor Players & their Sales Performance

The Major Players in the market are: HLL,

ITC, Nestle, Colgate-Palmolive, P&G, Dabur, Godrej, Nirma and Marico.

HLL is the biggest player in the industry

with presence in all the segments of the FMCG sector. The only company which matches HLL’s presence in the entire industry is P&G.

Food & Beverages segment leads the revenue pack followed by Personal Care and Homecare. Food & Beverages segment is growing at 9% and dependent on the season.Personal care segment leads the pack with the growth rate of 10% where Home caresegment is growing at 9%.

Growth Opportunities

 Large untapped rural market

 Export potential

 Increasing disposable income levels will result in faster revenue growth.

Present Challenges

 Competition from the unbranded players in rural market

 Mushrooming of regional brands like Nirma, Ghari & Jyothi Laboratories giving the nation-wide brands a run for their money

The project aims to forecast the future of HLL using a combination of the followingmethods:ExtrapolationIn the extrapolation method we will use the historical data, using which the forecast willbe done. As per this method we will weigh the recent data more heavily and smooth outcyclical fluctuations to forecast the trend. We then calculate an average and trend fromthe data and use these to derive a forecast.RegressionRegression analysis models the relationship between one or more response variables(also called dependent variables, explained variables) (usually named Y), and thepredictors (also called independent variables, explanatory variables) usually named X1...Xp).We will be using simple linear regression for the purpose of forecasting. Method ofLeast Squares will be employed for curve fitting.Sources & references: • HLL Website • CMIE Journal